Price spectrum for true value

Mobile communications are impossible without spectrum, a resource whose demand far exceeds its supply. It is, therefore, easy to understand the immense lobbying and posturing by operator associations prior to two imminent government decisions of potentially long-term impact.

Of the two, one relates to spectrum for advanced 3G and broadband wireless access services, and the other to operators contemplating a switch between the currently used mobile technologies—GSM and CDMA. At stake is whether Indian users will enjoy the full potential of wireless services in a competitive market.

The decision makers can allocate and price spectrum on economic principles followed worldwide. Or, they can continue with the perversities of a sloppy and unorthodox bureaucratic approach that rewards inefficiency, by encouraging operators to bloat subscriber numbers to corner spectrum at throwaway prices. Since only a rational regime can work in the long term, the pending decisions offer a unique opportunity for reform.

Will the decision makers rise to the challenge?

The US, Canada, the EU, Australia, Singapore and many other countries follow transparent competitive processes to allocate the price spectrum. Operators typically pay high upfront fees, but are free to choose the wireless technologies or services they deploy and the area in order to maximize the value of their investment.

In India, spectrum is bundled with cellular licences. There is no upfront fee or ‘entry cost’ for spectrum, although operators pay usage charges calculated as a share of their annual revenues.

Many argue that since the fees to provide mobile services in India are high, the huge bids for mobile licences represent a de facto market-based charge for spectrum and that the Indian and international approaches are equivalent. This is true, but only partly.

First, several lucrative mobile licences were never auctioned: The first eight licences for metros came at a fixed low price and government operators, BSNL and MTNL, got theirs free. Second, new licensees, e.g., Aircel, even after paying the high licence fee, have yet to receive the ‘bundled’ spectrum. Third, accepting that the high bids for subsequent licences reflect the value of spectrum—the attractive terms for additional spectrum given to operators were set through administrative orders, not competitive bids.

Currently, operators receive additional spectrum as they reach target subscriber numbers, and not target spectrum usage which would depend on network traffic. The previous minister for communications felt, like many others, that the approach encouraged mobile operators to overstate subscriber numbers to grab spectrum ahead of competitors.

The current practice of charging licence fees as share of operator revenues—especially if bureaucrats, not markets,decide them—presents its own difficulties.

Revenue sharing made sense when mobile telephony projects seemed risky, not now. Now, when an operator uses spectrum inefficiently and has lower revenues, it hurts others. Competitors lose use of the limited spectrum and the government, its share in revenue. Indeed, now there’s an incentive to understate revenues to escape paying the government. Yes, the incumbents have paid seemingly large sums in revenue shares, but price is still a bargain and, importantly, hurts competition.

India’s stake in spectrum management is greater than most successful economies since those virtually had ubiquitous coverage with fixed line phones before mobiles entered the scene. Wireless technologies are now the more cost-effective option for both voice and data services, including broadband. Hence, policymakers have the responsibility to ensure their deliberations lead to the most effective use of spectrum.

While their opposition to proposals for auctioning spectrum, which currently invites no upfront charge, is predictable, the cellular operators’ claim that “once a service provider has been granted a licence, he must be assured of adequate spectrum”, is hard to swallow. It implies, rather strangely, that the government is bound to, or can deliver an unlimited supply of spectrum to existing licensees as they expand their commercial networks.

Current mobile licences stipulate explicitly that additional spectrum will be allocated based on availability and justification, at prices to be decided later. Administrative orders have changed allocations as well as the share of revenues to be paid to government as usage charges—as they deemed appropriate. That alone shows there are no guarantees that operators can expect spectrum on subsidized prices and that new rules have been, as they should be, evolved to meet spectrum needs of all players and technologies in an equitable way.

Auctions for all future allocation can simplify both the decisions pending with the government. They can be easily designed to deter speculators as the auction of the fourth mobile licence clearly demonstrated. Auctions will encourage efficient use and efficient technology. The revenues generated can help meet costs of agencies such as the armed forces to vacate spectrum for civilian use, and of priority users who can’t be expected to compete with commercial heavyweights.

This will bring India unmistakably in line with regulatory best practices.

(Mahesh Uppal is a consultant in telecom regulation. Comment at theirview@livemint.com)